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Labor Market Policy Research Reports, October 13 – 18, 2012 Print
Written by Mark Azic   
Friday, 19 October 2012 14:00

Here’s a roundup of labor market research reports released in the past week:


Economic Policy Institute

Paid Sick Days: Measuring the Small Cost to New York City Businesses
Elise Gould and Doug Hall


Employment Policy Research Network

Immigration Policy for Less Skilled Workers
Harry Holzer

 
Home Loans From Washington? A Simple Alternative Print
Written by Dean Baker   
Wednesday, 17 October 2012 11:45

In the good old days, we just had Fannie Mae, there was no Freddie Mac, nor were there mortgage-backed securities. Fannie Mae was a public company, no shareholders, just the government. And there were none of the privately issued mortgage-backed securities that blew up so spectacularly when the housing bubble collapsed.

During this period we saw an unprecedented surge in middle-class and working-class homeownership. It was during the decades after World War II that a majority of the country became homeowners. Then in the late 60s we moved away from this simple system. We privatized Fannie Mae and created its sibling Freddie Mac as a quasi-public corporation. Both provided dividends and capital gains for shareholders and Wall Street pay for top executives, while giving the risk to taxpayers. During the 40-plus years that we opened up the system to the private sector, we have made almost no progress in expanding homeownership.

It is reasonable to ask why we don’t just go back to the old system. After all, the system of home finance was supposed to make homeownership simple and cheap. The old Fannie model did just that. Given that Fannie Mae and Freddie Mac are now both effectively owned by the government, it would seem the simplest route is to just leave them owned by the government.

Many economists and policy analysts have been employed at six-figure salaries designing convoluted new public-private hybrids. And there will undoubtedly be many seven-figure jobs running these hybrids corporations if these plans are put in place. However, there is zero reason to believe that these convoluted schemes will better serve homebuyers than a simple government-run mortgage system.

The people who want to buy mortgages that resemble complicated lottery games will still have the option to go to Wall Street for whatever crazy products its wizards can dream up. But the vast majority of people who see a mortgage as a way to finance a home purchase will have a low cost alternative. What’s wrong with that?

This post originally appeared on the New York Times' Room for Debate.

 
Nanny State Conservatives Protect Drug Company Profits: Infant Formula Edition Print
Written by Shawn Fremstad   
Tuesday, 16 October 2012 15:15
The New York Times has a good article on the growing movement to limit the marketing of infant formula to new mothers while they’re in hospital maternity wards. In NYC, the Health Department has launched a “Latch on NYC” initiative to support breastfeeding mothers. Maternity hospitals that join the initiative agree to not distribute promotional infant formula provided by formula manufacturers. Instead, formula is treated like medications and other supplies, and provided when necessary on an individual basis.

The policy has been harshly criticized by Rush Limbaugh and other conservatives who have described it as a “nanny state” initiative. Their hero is Mitt Romney who, according to the NYT, made decisions as governor to "pressure the state’s Public Health Council to reverse a ban on formula giveaways and replace three council members who objected." (For more on Romney's decision, see this in-depth treatment by the Massachusetts Breastfeeding Council.)

What the NYT doesn’t explain is that Limbaugh and Romney are the real nanny-state proponents. U.S. infant formula is highly concentrated with three manufacturers (Abbott, Mead Johnson, and Nestle) accounting for 98 percent of the industry’s $3.5 billion in sales. The infant formula industry is massively subsidized through the Women, Infant, Children (WIC) program. The U.S. Department of Agriculture estimates that 57-68 percent of all infant formula sold in the United States by these three manufacturers was purchased through the WIC program.

Efforts like "Latch on NYC" and the Massachusetts ban vetoed by Romney would likely increase breastfeeding and reduce reliance on formula. This would be good for taxpayers who subsidize the formula market through WIC—and babies—but not for nanny-state conservatives who want to protect the profits of the big-3 infant formula manufacturers.

 
Family Leave Insurance in New Jersey Print
Written by Eileen Appelbaum   
Tuesday, 16 October 2012 09:45

As family and work patterns have shifted over recent decades, the demand for time off from work to address family needs has grown rapidly. “Work-family balance” has become an urgent but elusive priority for millions of Americans, driven by high labor force participation rates among mothers as well as the caregiving needs of an aging population.  Women—and increasingly men as well—often find themselves caught between the competing pressures of paid work and family responsibilities, especially when they become parents or when serious illness strikes a family member.

In the U.S., workers typically rely on a patchwork of employer-provided benefits to make ends meet, such as paid sick leave, vacation, disability insurance, and/or parental and family leave. However, such employer-provided benefits are by no means universally available. Managers and professionals, as well as public-sector workers and others covered by collective bargaining agreements, often do have access to benefits that provide some form of wage replacement during a family leave.  But vast sectors of the U.S. workforce have little or no access to paid sick days or paid vacation, and paid parental or family leave is even rarer. The situation is particularly acute for low-wage workers.

Against this background, California’s implementation of the nation’s first comprehensive Paid Family Leave (PFL) program in 2004 was a historic breakthrough. In 2009, New Jersey became the second state in the nation to implement a Family Leave Insurance (FLI) program to provide partial wage replacement for workers during periods of family leave. For up to 12 months after a birth or adoption, or at any time for the care of a seriously ill child, parent, spouse, or domestic partner, workers in these two states – both women and men – are eligible for six weeks of partial wage replacement per year. The programs in both California and New Jersey were designed in part to address the sharp disparities among workers in access to paid family leave. In particular, low-wage workers who previously had limited or no access to wage replacement during leaves stood to gain from family leave insurance, which promised to narrow the gap in access to paid leave between the “haves” and “have-nots.”

Read more...

 

 
Labor Market Policy Research Reports, October 6 – 12, 2012 Print
Written by Mark Azic   
Friday, 12 October 2012 15:45

Here’s a roundup of labor market research reports released in the past week:


Economic Policy Institute

Counting up to Green: Assessing the Green Economy and Its Implications for Growth and Equity
Ethan Pollack 


Employment Policy Research Network

The Missing Link in School Reform
Carrie R. Leana


Institute for Women’s Policy Research

The Status of Women in North Carolina

 
JOLTS and Structural Unemployment Print
Written by Mark Azic   
Friday, 12 October 2012 12:15

Every month, the Bureau of Labor Statistics conducts the Job Openings and Labor Turnover Survey (JOLTS). The survey asks businesses questions about hirings, firings and layoffs, workers quitting, and the number of job openings they have. This past Wednesday, the BLS released the JOLTS for August. Using data from the JOLTS and unemployment, a ratio of the number of unemployed workers to the number of job openings, called the job seekers ratio, can give an idea of how tight the labor market is. For August, the job seekers ratio is at 3.5, meaning that for every one job opening there are three and a half unemployed workers. While this is a lot better than the high of 6.7 reached in July of 2009, it’s a far cry from the 1.7 ratio averaged from 2005 through 2007.      

Another interesting part of the JOLTS is that it’s broken down by industry. This gives insight into which industries are hiring, and which aren’t. If you’ve paid attention to very serious people – or very, very serious people – you’ve no doubt heard the argument that our unemployment problems are a mismatch between workers’ skills and the jobs of the 21st century. This argument is called “structural unemployment.” If the economy suffers from structural unemployment, government policies to boost spending won’t help. Instead, the unemployed need to get retrained for the jobs that are available. Then the unemployment crisis will disappear. Unfortunately, this story disagrees with the data/reality. 

Read more...

 

 
American Recovery and Reinvestment Act was a Missed Opportunity Print
Written by Dean Baker   
Friday, 12 October 2012 10:45

As part of Zócalo Public Square's "Up for Discussion" series, Dean Baker discussed the topic "Will the [American Recovery and Reinvestment Act of 2009] eventually be remembered as a new “New Deal”?" — an argument made by Michael Grunwald, in his new book "The New, New Deal."

As has often been said of Barack Obama’s supporters, Michael Grunwald has drunk the Kool-Aid. While the stimulus certainly helped boost the economy in a situation where it was facing its worst downturn since the Great Depression, it will be remembered more as a lost opportunity than as a transforming set of changes like the New Deal.

President Obama took office with the economy in a free-fall. The opposition had been completely discredited by pursuing the policies that had brought on this disaster. His own popularity ratings were in the stratosphere. President Obama could have seized this opportunity to try to turn the economy in a fundamentally different direction.

This would have meant first and foremost building on the anger the country felt toward the large Wall Street banks. If he had taken an aggressive stance of prosecuting criminal activity and breaking up large insolvent banks, he almost certainly would have the support of the vast majority of the country. It is unlikely that the Republicans in Congress could have sustained resistance that was centered on protecting the large banks responsible for the disaster.

He also should have clearly laid out the need for large, sustained stimulus to replace the $1.2 loss inannual demand as a result of the collapse of the housing bubble. While it is impossible to know how successful he would have been in getting more stimulus, the failure to go this route almost certainly condemned the country to a decade of high unemployment and weak growth.

Furthermore, President Obama has done nothing to get the dollar down to a level consistent with more balanced trade. This leaves the economy’s fundamental imbalance to be dealt with further down the road. Nor did he take any steps to provide workers with more leisure time by bringing the work year in the United States more in line with the work year in other wealthy countries.

There were major political obstacles to a real New Deal, but that it not an excuse for trying to invent one out of whole cloth.

 
Homeownership: Dream or Nightmare? Print
Written by Dean Baker   
Friday, 12 October 2012 09:15

Politicians have told us for decades that homeownership is the American Dream. They do this because they get lots of contributions from interest groups that have a stake in pushing homeownership: builders, real estate agents, mortgage bankers, and many others who stand to get a share of the spoils. But letting politicians determine our dreams is never good policy.

While homeownership may often provide a good path for secure housing and a route to accumulate wealth for moderate- and middle-income families, it's often not the best option. The reason is very simple: There are large transactions costs associated with homeownership. A person planning to buy a home can expect to pay fees on a mortgage, title insurance, fees for an inspection, an appraisal, a survey, and in many states a transfer tax. These fees can easily come to 3-4 percent of the purchase price of a home.

Homeowners face a similar story on the sell side. The most important cost of selling a home is usually the Realtors’ fee, which is typically 6 percent of the sale price. In total the average round-trip cost of buying and selling a house is likely to be in the neighborhood of 10 percent of the purchase price.

This is a lot of money to throw in the garbage. For a $250,000 house this would imply transactions costs of $25,000. That would be more than two years of rent for a place that rented at $1,000 a month.

Read more...

 

 
Private Equity’s Handiwork – Saving or Pillaging, You Be the Judge Print
Written by Eileen Appelbaum   
Wednesday, 10 October 2012 14:05

In today’s DealBook column in the New York Times, Stephen Davidoff celebrates the financial wizardry of PE firm Apollo Global Management and lauds its heroic actions saving real estate company Realogy from bankruptcy.  But is the hoopla warranted?

In 2007 Apollo bought Realogy for about $8 billion, contributing $2 billion in equity and loading the company with $6 billion in debt.  As Davidoff observes:

"Not only was the deal struck as the housing market was crashing, but Apollo saddled Realogy with too much debt. The company was left nearly bankrupt."

Revenues fell as the housing bubble burst, but Realogy management was stuck paying about $600 million a year in interest payments on all that debt plus $15 million a year in management fees to Apollo. To stay alive in these circumstances, Realogy management “savagely cut costs” according to Davidoff, eliminating a third of jobs and closing or consolidating over 350 offices.

Workers weren’t the only losers. Creditors also lost big time. As Realogy skirted bankruptcy, its debt fell in value to just 10 cents on the dollar. In a familiar move for Apollo which has done this with other deals weighed down by excessive debt, the PE firm bought up its own debt on the cheap. Apollo also announced that it would put more equity into Realogy to keep the company going.  These steps moved Realogy back from the brink of disaster and yielded a healthy return as the loans Apollo it had bought from Realogy’s creditors recovered.

Apollo did fine, but clearly no value was created by its actions; instead, Apollo saw its returns go up but at the expense of Realogy’s creditors. This is what economists call rent-seeking:  Apollo’s actions didn’t add value to Realogy and increase the size of the economic pie. But they did increase the size of Apollo’s slice of the pie by reducing the size of Realogy’s creditors’ slice.

Realogy is still not out of the woods. Apollo is planning to take the company public via an IPO, a risky bet for public market investors since Realogy still carries a large debt load and its revenues are likely to remain flat unless the housing market recovers.  Incredibly, Davidoff finds Apollo’s behavior laudatory:

"Of course, Apollo had no one to blame but itself for Realogy’s precarious situation, having loaded it up with debt in the first place. Nevertheless, the story of Realogy shows how private equity firms can use financial wizardry to save a company, not pillage it."

Not pillage the company and its creditors? Really?

 
Labor Market Policy Research Reports, September 29 – October 5, 2012 Print
Written by Mark Azic   
Friday, 05 October 2012 15:00

Here’s a roundup of labor market research reports released in the past week:


Center for Economic Policy and Research

The Problem With Structural Unemployment in the U.S.
Dean Baker


National Employment Law Project

Getting Real: Time to Re-Invest in the Public Employment Service
Claire McKenna, Rick McHugh, and George Wentworth

 
Urban Myth: Structural Unemployment in Today's Economy Print
Written by Nicole Woo   
Wednesday, 03 October 2012 10:15

Journalists, pundits, politicians and the public will undoubtedly pay a lot of attention to the unemployment numbers that will be released this Friday.  It's important to understand whether the reasons for current unemployment are mainly structural -- that worker's skills or geographic location don't match up to available jobs -- or cyclical -- that there just aren't enough jobs out there.

CEPR, along with plenty of other economic experts, agree that no matter how you look it, current unemployment is mostly cyclical -- there just isn't enough demand in the economy.  CEPR's John Schmitt and Kris Warner explain why it's so important to get this right:

The distinction between structural and cyclical unemployment has crucial implications for economic policy. If unemployment is “structural” then government policy that seeks to increase demand – low interest rates or fiscal stimulus, for example – will have little or no effect on the national unemployment rate and could even make matters worse by igniting inflation. If unemployment is “cyclical,” however, then expansionary  macroeconomic policy can lower unemployment substantially with little or no risk of inflation.

Their detailed paper, "Deconstructing Structural Unemployment," looks at 2 arguments for structural unemployment, and find little support for either:

The first argument is that if unemployment is structural, then there would be evidence that the large supply of unemployed construction workers lack the skills needed to find new jobs in other sectors of the economy. While construction workers have indeed suffered disproportionately in the downturn (due to the bursting of the housing bubble), it turns out that  they have also been at least as successful in coping with the hostile labor market of recent years as workers displaced from other sectors. And construction workers’ skills are at least as well matched to the available jobs as workers displaced elsewhere in the economy.

The second argument is that falling house prices have reduced the mobility of unemployed workers — creating a “house lock” in which unemployed workers, who would otherwise relocate to regions with jobs, are stuck in high unemployment areas.The downturn in the housing market also appears to have had no measurable effect on the geographical mobility of displaced workers, but the economic effects are small, raising the pool of the unemployed by only a few percent (and the unemployment rate, by a much smaller amount).
Read more...

 

 
Labor Market Policy Research Reports, September 22 – 28, 2012 Print
Written by Mark Azic   
Friday, 28 September 2012 14:45

Here’s a roundup of labor market research reports released in the past week:

 

Center for American Progress

Social Security Cares: Why America is Ready for Paid Family and Medical Leave
Ann O’Leary, Matt Chayt, and Eve Weissman

 

After Don’t Ask, Don’t Tell: Ensuring the Health of Gay and Transgender Veterans
Andrew Cray

 

Economic Policy Institute

The Decline of Collective Bargaining and the Erosion of Middle-Class Incomes in Michigan
Lawrence Mishel

 

National Employment Law Project

State Reforms Reducing Collateral Consequences for People with Criminal Records: 2011-2012 Legislative Round Up

 
CEPR News September 2012 Print
Written by Dawn Lobell   
Friday, 28 September 2012 11:30

The following highlights CEPR's latest research, publications, events and much more.

CEPR on Jobs: the Good, the Bad and the Ugly

CEPR followed its July 2012 paper, “Where Have All the Good Jobs Gone” with the September release of “Bad Jobs on the Rise.” The paper’s authors, CEPR Senior Economist John Schmitt and Research Assistant Janelle Jones, found that almost one-fourth of U.S. workers are in a bad job (defined as one that pays less than $37,000 per year, does not have employer-provided health insurance, and lacks some kind of retirement plan). Despite substantial increases in the education, age, and quantity and quality of technology over the last three decades, the researchers found that the share of workers with a “bad job” has risen since 1979.

The report featured prominently in this piece on job quality in Today.com’s Life Inc. Janelle penned a related post for the CEPR Blog titled “Bad Jobs Bad Jobs Watcha Gonna Do?” and she produced this bad jobs infographic.

CEPR’s “good jobs” paper continues to receive media attention. It was mentioned in this Labor Day piece by Harold Meyerson in the Washington Post and in this article on unions in the American Prospect. Tim Noah cited the paper at The New Republic blog, and it was also cited in this piece in the Christian Science Monitor.

CEPR also weighed in on the September jobs numbers in the monthly Jobs Byte. CEPR Co-director Dean Baker was on The Kudlow Report talking about the jobs report, while CEPR Senior Economist Eileen Appelbaum was on BBC World's Business Edition. 

Dean shoots down the confidence fairy and explains supply and demand in this clip from CNBC.  Dean also appeared on Fox Business News, where he answered the question: Jobs Blame Game: Lack of Skills or No Demand? (If you can’t watch, you can read this Beat the Press post to see how he answered).

Read more...

 

 
USA Today Says It's Time to Tax Wall Street Print
Written by Nicole Woo   
Thursday, 27 September 2012 12:45

The financial transaction tax has truly gone mainstream, with the nation's widest-circulation print newspaper, USA Today, endorsing it as a way to tamp down on dangerous high-speed trading. Their editorial, High-frequency trading insanity, states:

Slap a small transaction tax on rapid trades, impeding the practice and returning markets to their core purpose.
That would be a big win for small investors, and the only people harmed would be those now putting everyone else at risk.

USA Today joins other leading editorial boards, including the Boston Globe and New York Times, in calling for a taxes of a fraction of a percent on Wall Street trades.

Dean Baker of CEPR was credited soon after the financial crises of 2008 as "the most vocal proponent of the tax." With Robert Pollin of the University of Massachusetts-Amherst, he's helped build an academic case for the tax over the past decade.  And they're joined by fellow prominent economists, including Nobel Laureates Joseph Stiglitz and Paul Krugman.

Even financial industry players have stepped up and supported the idea, such as John Bogle, the founder of the Vanguard Group; Bill Gates, Chairman of Microsoft; Mark Cuban, billionaire investor; and over 50 financial experts who signed this open letter in support of financial transaction taxes.

Currently there are 15 bills before Congress that include some form of the financial transaction tax.  So far, the non-partisan Joint Committee on Taxation has provided an official revenue estimate for the Wall Street Trading and Speculators Tax Act: over $350 billion over 9 years from a tax of 3/100 of a percent on Wall Street trades. This swamps the amounts that could be collected from many other options that are being debated. 

The list of supporters of a tax on financial speculation is diverse and growing.  In a time of cuts to vital programs and services, as well frightening flash crashes on Wall Street, the financial transaction tax certainly deserves serious consideration by the media, the public, and our leaders.

 
Billing for Bad Bills Print
Written by Dean Baker   
Thursday, 27 September 2012 07:27

Virtually everyone has had the experience of paying a penalty for not paying a bill correctly. Making a credit card payment a day late or accidentally writing a check to the phone company for a dollar too little can cost consumers twenty or thirty dollars. And overdraft fees on checking account or debit accounts make even the most trivial adding err quite costly. But what happens when the mistake is on the other side?

Suppose the bank wrongly charges a $20 fee for having an insufficient balance in your account or the phone company charges you for services that you didn’t receive? Usually, if you can document your case and take the time to work your way through the maze of computer messages (press “1” for billing, press “2” for sales, etc.) to talk to a real human being  you can get the company to  remove the charge.

This requires both that consumers catch the error and then use a considerable amount of their time to correct the company’s mistake. At the end of the process they have just managed to break even, both the consumer and the company are in the same situation as if the mistake had never been made.

Notice the asymmetry in this story? If a consumer is a day late or a dollar short in their payment, they face big penalties. When the bank, the phone company, or the insurance company makes what could be a very large error, they face no downside risk, if the mistake is caught.

The last part of this story is important. Undoubtedly many errors made against consumers are not caught. Many people don’t review their bills closely enough to ensure that they are accurate. That becomes more likely as bills become more complicated. (Companies do make errors that favor consumers, but these are under their control.)

This creates a warped system where companies effectively have an incentive to mistakenly bill people for services that they did not provide or for fees they do not owe. Insofar as these billings go undetected this is free money for the company. Imagine sending letters telling people they owe you $30 for some non-existent service. In effect this is what companies are doing when they send out erroneous bills, but they get to save the postage and handling costs since they were sending out the bills anyhow.

There is an easy way to change the incentives. Suppose companies had to pay a penalty for improper bills. What if the law required that they pay a fee equal to 20 percent of any excess charges that appear on a bill? If the bank wrongly charges you $20 for an insufficient balance, then they have to credit you with an extra $4 as a result of the error. Or, if the insurer charges $200 for a procedure that was supposed to be covered under your policy, then they would owe you $40.

This would both give people more incentive to look at their bills closely and more importantly give companies incentive to get the bills right. Erring against consumers would not offer them the same opportunity for a free lunch as it does today.  

It would be interesting to see the counterargument against such legislation from the industry side. Undoubtedly the Chamber of Commerce will produce a study showing that such a rule would cost businesses trillions of dollars in penalties. (And the media would no doubt report the findings uncritically.)

Fans of logic would point out that such a rule would only be costly if businesses are currently ripping off consumers for large amounts of money by billing them more than they owe. In this case we should want these businesses to pay lots of money. After all, what is the argument for businesses that rip off their customers? This rule would also work to the advantage of businesses that can figure out proper billing.

So that’s the cheap thought for the day. We can bill businesses that improperly bill their customers. It’s simple and fun will make for better markets, with no undeserving losers. In other words, it’s the sort of proposal that is a complete non-starter in Washington.

 
David Brooks Thinks Sweden Is More Chaotic than Syria Print
Written by Shawn Fremstad   
Wednesday, 26 September 2012 11:15

What I've called the "disorganized single-parent" meme reappeared earlier this week in David Brooks' column: "There are very few [conservatives] willing to use government to actively intervene in chaotic neighborhoods, even when 40 percent of American kids are born out of wedlock."

As in other appearances, the basic formulation of the meme is as follows: (Women + Children) - Men = Disorganization = Chaos.

Here are some other countries in which chaos reigns because 40 percent or more of children are born to parents who are not married:

% of Children Born to Unmarried Parents in 2010
Iceland 64.3
Estonia 59.1
Slovenia 55.7
France 55.0
Norway 54.8
Sweden 54.2
Bulgaria 54.1
France 54.1
Denmark 47.3
United Kingdom 46.9
Belgium 46.2
Netherlands 44.3
Latvia 44.1
Portugal 41.3
Finland 41.1
Hungary 40.8
Czech Republic 40.3
Austria 40.1

By contrast, in a more orderly and less chaotic society like Syria, marriage is valued so highly that the share of children born to unmarried parents is nearly 0 percent.

That said, the only data on nonmarital childbirth I could find for Syria was from the 1990s. I've heard things have gotten more disorganized there lately. If this is the case, it must be because they let things slip on the marriage front. Memo to Syrian conservatives: take David Brooks' advice, you need to be more "willing to use government to actively intervene in chaotic neighborhoods"! If you don't act soon, it will be too late and you'll end up like Sweden.

 
Labor Market Policy Research Reports, September 15 – September 21, 2012 Print
Written by Mark Azic   
Friday, 21 September 2012 15:23

Here’s a roundup of labor market research reports released in the past week:

 

Center for American Progress

Comprehensive Paid Family and Medical Leave for Today’s Families and Workplaces

Heather Boushey and Sarah Jane Glynn

The Repeal of Don’t Ask, Don’t Tell – 1 Year Later

Crosby Burns and Alex Rothman

Making Saving for Retirement Easier, Cheaper, and More Secure

David Madland

 

Center on Budget and Policy Priorities

Misconceptions and Realities About Who Pays Taxes

Chuck Marr and Chye-Ching Huang

2011’s Decline in Uninsured is Largest in 13 Years, but Median Income Fell, Inequality Widened, and Poverty Stayed Flat

Arloc Sherman and Danilo Trisi

National Women’s Law Center

Insecure and Unequal: Poverty and Income Among Women and Families, 2000-2011

 

Political Economy Research Institute

The Employment Impacts of a Low-Carbon Fuel Standard for Minnesota

Heidi Garrett-Peltier

Low Pay, Employment and Labor Market Regulation: Lessons from France?

David R. Howell, Bert M. Azizoglu, and Anna Okatenko

 
Don't Let Them Tweak Social Security Print
Written by CEPR   
Friday, 21 September 2012 14:13

band-on-the-run

Social Security is the country’s most important social program. It has kept tens of millions of retired and disabled workers and their families out of poverty over the last seven decades. It is also an enormously popular program, with overwhelming majorities of people across the political and ideological spectrum telling pollsters they support the program and don’t want to see it cut.

This is why politicians who want to cut Social Security try to find backdoor ways to reduce benefits. The favorite in Washington these days is a plan to reduce the annual cost of living adjustment by 0.3 percentage points. This cut would be done by using a different index for measuring inflation.

A reduction of 0.3 percentage points might sound trivial, but it adds up over time. After 10 years, peoples’ benefits would be reduced by 3 percent; after 20 years, the reduction would be 6 percent. For an elderly population that is already living pretty close to the poverty line, this is a serious issue.

But, here in Washington, the popular line among politicians and others is that the proposed cuts would simply amount to a “change.” In fact, the Washington Post recently ran an editorial in which they described this proposed cut as a “tweak [to] the inflation calculator.” Ironically, this comment appeared in an editorial that condemned Vice President Joe Biden for a lack of courage because he opposed cuts to Social Security.

Perhaps there are valid arguments to be made as to why Social Security benefits should be reduced. But the people who support cuts should be forced to make these arguments and win their case in public debate. They should not be allowed to go behind everyone’s back and make their cuts in the dark of night.

This is where CEPR comes in. In this case, as in so many other areas, CEPR will be shining its flashlight so that no one is allowed to “tweak” Social Security. And this is where you come in - we need your help to do so. Please click below and donate to CEPR to make sure we have the battery power necessary for the job. It’s crucial that our voice is heard. We’re up against a powerful elite. With your help, we can stand strong and shine the light in their eyes.

Thanks for your support,
Dean, Mark and CEPR Staff

 
The Poverty Rate is Higher than the Federal Government Says It Is Print
Written by Shawn Fremstad   
Friday, 21 September 2012 09:59

Citing a new paper by Bruce Meyer and James Sullivan, a Bloomberg editorial opines that “poverty isn’t as high as the U.S. government says it is.” The reason according to Bloomberg is that the current official measure: 1) doesn’t count the EITC and certain other means-tested benefits, and 2) sets the poverty line too high by “ignoring discount prices at big-box outlets such as Wal-Mart Stores Inc., where many low-income families shop.”

The current measure is deeply flawed. It should use a more comprehensive after-tax measure of income, so Bloomberg critique number 1 is mostly right.

But critique number 2 is completely off base: the problem with the current poverty threshold—about $22,000 for a family of four in 2010—is that it is much too low to serve as a measure of a minimally decent living standard in today’s economy. 

If we fixed both of these problems, the poverty rate would be higher than currently reported, not lower. And, in fact, this is confirmed by the Meyer-Sullivan paper, which finds that the poverty rate is around 17 percent if we used a modern poverty threhsold.

The current threshold is too low because it was set in the early 1960s using late-1950s data, and has only been adjusted for inflation since then, and not for the general increase in average living standards over the last half-century. A “base-1959” poverty measure made sense in the early 1960s. It’s absurd and indefensible half a century later.

If you're not sure you agree with me on this, ask yourself if you should only receive “base-1959” Social Security benefits, i.e., the 1959 benefit level adjusted for inflation. The Social Security benefits we receive when we retire are initially adjusted for the increase in the national average wage index, which ensures, as SSA explains, that “a worker's future benefits reflect the general rise in the standard of living that occurred during his or her working lifetime.” I’m guessing most Americans think this is a sound approach.

Meyer and Sullivan exacerbate the base-1959 problem with the FPL by adjusting the poverty threshold down further using the CPI-U-RS, a research version of the CPI. There are times to use the CPI-U-RS to show trends, but this is not one of them. The main effect of using the CPI-U-RS here is to lower an already too-low poverty threshold by even more—so, for example, the threshold for a family of four, is cut by about $2,500 or 11 percent. One of the results: the Meyer-Sullivan-adjusted poverty threshold falls from 55 percent of median income for a family of four in 1959 to only one-third of it in 2009. In essence, deprivation is defined even further down that it is using the current base-1959 FPL.

That said, the Meyer-Sullivan paper does include some useful information and analyses. In particular, they also calculate income poverty rates since 1960 using a threshold set at 50 percent of median income, roughly the level at which our current FPL was set at initially. This measure tells a much different story: the poverty rate ends up being about 17 percent in 2010, rather than 11.7 percent (both figures here use a comprehensive measure of income that includes the EITC, SNAP, etc). In other words, when poverty is measured in a completely reasonable fashion—using the same measure used in most other wealthy Western nations—it is higher than the official measure suggests. 

Finally, Meyer-Sullivan think that poverty should be measured using consumption data rather than income data, and that doing so would, again, show that poverty rates are much lower than official data show. Consumption vs. income is a complex issue that merits a post of its own when I get the chance. I think consumption poverty measures might play a useful supplementary role some day, but they're not ready for prime time. Here it is worth noting that the Meyer-Sullivan consumption poverty estimates show a steep and implausible decline in poverty in the 2000s during the Bush Administration, one that diverges from the trend we see using income data (and other hardship data, such as food insecurity). In this area, I find more plausible this new working paper by Jonathan Fisher, David Johnson, and Tim Smeeding, which finds that that both consumption inequality and income inequality trends track each other fairly closely between 1985 and 2005. 

 
"Challenge" Publishes CEPR Private Equity Primer Print
Written by Nicole Woo   
Thursday, 20 September 2012 10:18

"A Primer on Private Equity at Work," by Eileen Appelbaum of CEPR and Rosemary Batt of Cornell University, has been published in the September-October issue of Challenge: The Magazine of Economic Affairs (behind a paywall here).

Based on this February 2012 CEPR working paper, the primer pulls from a widely-cited body of research to illuminate some of the major controversies surrounding private equity, including whether private equity creates or destroys jobs, whether it provides better returns than the broad stock market to investors, and whether the debt burden assumed by firms acquired by private equity substantially increases the risk of bankruptcy. 

It finds that targets of private equity usually have faster job growth than other companies before they are taken over. On average they also have higher rates of profitability. The claim that private equity mostly helps struggling companies is not borne out by the facts. Moreover, the investors who provide private equity firms with the capital typically make less money than if they had invested in a stock market index. It is a much-needed primer on what private equity firms actually do.

 
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